Do Acquirers Offer a Higher Bid Premium to Target Companies as Their Demand Increases?: The Effect of Percent Sought on the Announced Bid Premium

Abstract: This thesis investigates if microeconomic theory of supply and demand can explain financial markets by examining the effect of percent sought on the announced bid premium. However, to analogically apply the law of supply on financial markets is controversial due to the Efficient Market Hypothesis which implies that the supply curve for stocks should be flat. The results are obtained through multiple regression analysis and indicate a significant and positive relationship between percent sought and the announced bid premium. Moreover, the focal variable is significant and robust for a broad set of control variables. Thus, the results indicate that acquirers offer a higher price as their demand for a particular stock increases. We conclude that corporate investors perceive stocks of target firms as something more than a general right to future dividends. Management and company specific characteristics, such as selected rationality, unfeasible internal development, and diminishing marginal utility of wealth, are highlighted as likely explanations.